Energy Transfer has a huge 7.9% yield.
The highest yield isn’t always the most desirable one to own.
If you are looking to generate a reliable income stream, you’ll be better off with these two no-brainer energy stocks.
10 stocks we like better than Energy Transfer ›
High-yield stocks have to be treated with caution. If you just buy the highest-yielding investments you can find, you are likely to be let down. The key is to find a balance between risk and reward, which is what you’ll achieve by investing in Enterprise Products Partners (NYSE: EPD) and Enbridge (NYSE: ENB). Here’s why these are no-brainer high-yield energy stocks today.
The modern world can’t function without energy, which is why most investors should have some exposure to the energy sector in their portfolios. However, the energy sector also tends to be highly volatile, due to the fluctuating prices of energy commodities such as oil and natural gas. This top-level view, however, doesn’t tell the whole story.
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The energy sector is generally broken down into three parts: the upstream, the midstream, and the downstream. The upstream is where oil and natural gas are produced. The downstream is where oil and natural gas are processed into usable products. Both are commodity-driven and volatile. The midstream, by contrast, is a toll-taker business that connects the upstream to the downstream and the rest of the world. The volume flowing through a company’s pipelines and other energy infrastructure is what’s most important in the midstream, not the price of the commodities being used.
Even during deep energy market downturns, demand for oil and natural gas tends to remain robust. This is why even conservative dividend investors can be comfortable investing in the midstream if they are looking to add some energy exposure to their portfolios. However, not all midstream businesses are equally reliable, and examining yield alone is insufficient to determine whether an investment is worth owning.
If all you did was look at yield, you might buy a midstream player like Energy Transfer (NYSE: ET). Its 7.9% yield is far higher than the 6.7% yield you’d collect from Enterprise Products Partners or the 5.7% dividend yield on offer from Enbridge. In fact, Energy Transfer’s business isn’t a bad one, but its history as an income stock is lacking. In 2020, the distribution was halved.
In fairness, 2020’s cut occurred during the midst of the coronavirus pandemic. It was a highly uncertain time for the world and for energy markets. The decision helped to solidify the balance sheet and set Energy Transfer up well to survive both that period and future periods of uncertainty. However, it also set a precedent that investors looking to live off the income their portfolios generate shouldn’t ignore. Enterprise and Enbridge both increased their shareholder payments in 2020.
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